According to the firm, while they maintain their long-term thesis that AMZN will continue to dominate eCommerce, taking share from both offline and other online competitors, they are concerned that a more prolonged investment period – namely due to an increase in content costs and the signing new distribution deals with various Internet connected hardware providers, such as game consoles, TVs, Set Top Boxes, and Blu-Ray players - may occur for a longer period than they were originally anticipating.

No longer expecting lower costs in 2H – UBS notes they were expecting 50 bps and 130 bps of Y/Y margin improvement in Q3 and Q4, respectively – they believe this is no longer likely given that they see significant competition for content deals that will only continue to heat up – similar to their concerns with NFLX, they do not believe that AMZN will be immune to the rising cost of content as they seek to sign new agreements to build out their streaming offerings. Firm notes margin is already pressured from continued investment in IT and fulfillment centers. It now looks likely AMZN will need to invest in 1) acquiring content, 2) distribution deals, and 3) technology. UBS also expects free shipping (4.3% of rev in Q4) costs to increase alongside Prime membership.

UBS offers five incremental cost scenarios – firm's sensitivity analysis suggests thenew service could impact F11 EPS by $0.41, assuming an incremental $250MM in F11 expenses. Their scenarios provide insight on quarterly and annual EPS impact of additional $100MM, $250MM, $500MM, $750MM, and $1B in content / distribution costs. They weighted the expense towards the back half of the year.

Notablecalls: Well this is a bit of a shocker. This isn't your oh-so-usual valuation downgrade. UBS is toying with an idea of an earnings miss. They are modeling 0.41 EPS impact in 2011. Putting a 40-60x multiple on this yields $16-24 bucks (10-15%) of potential downside.

Remember, UBS was ahead of consensus #'s coming into this call.

With this recent shaky tape, people will take notice.

I'm guessing we will see a 3-4% move in AMZN today, putting 172-170 levels in play.

Friday, February 25, 2011

Credit Suisse is upgrading CBOE Holdings (NASDAQ:CBOE) to Outperform from Neutral with a $32 target (prev $25) noting they see a high likelihood of the exchange being bought in the coming months.

Historically, exchange consolidation has come in waves, and CSFB sees a high likelihood of at least 1-2 more deals over the coming months. Among the major U.S. financial exchanges, they see CBOE as the most likely near-to-intermediate term takeout candidate. What makes the CBOE franchise attractive? Firm views the company’s fast-growing U.S. options footprint, flagship proprietary index options business (SPX, VIX), meaningful post-demutualization earnings ramp-up and opportunity to realize economies of scale as all reasons why CBOE should be a participant in this round of industry consolidation.

What makes CBOE attractive to potential acquirers? Ability to leverage the combined organization’s scale through consolidation of trading platforms and redundant technology operations to realize cost synergies. In addition, they believe a combination with CBOE would also give the pro forma company exposure to the fast growing, albeit highly competitive, U.S. options market. Specific to CBOE, CSFB believes potential partners would derive the most strategic benefit in the exchange’s proprietary index options business given its strong defensibility and the potential to broaden into new product arenas. To this end, the franchise is on the verge of launching Gold Volatility Index options and futures pending regulatory approval. Volatility product traction has been robust (VIX futures and options averaging 435,000 contracts as of last update in early February, up 64% from 265,000 in 2010).

What Could a NDAQ-CBOE Deal Look Like?Strategic Rationale—Improved Revenue Growth Profile, Realize Scale EfficienciesCSFB believes a NDAQ-CBOE combination would have strong strategic merits for both companies. Specifically, for NASDAQ OMX a merger would further diversify its revenue base away from the more mature and intensely competitive cash equities businesses by increasing its exposure to the much faster growing, but also somewhat competitive, U.S. options market. In particular, they see the addition of CBOE’s flagship proprietary index contracts (SPX, VIX) as helping to improve NASDAQ OMX’s revenue growth prospects.

Wednesday, February 23, 2011

Baird is out with a potentially significant call on Omnivision Tech (NASDAQ:OVTI) noting their field research points to Omnivision having lost significant share in PCs as well as in China late last year due to its focus on Apple, while its new 8mp sensor may not be ready for the initial iPhone5 launch, suggesting Sony could win all of initial iPhone 5 procurement orders. BSI yields remain sub-par while Omnivision has yet to secure new capacity, in their view. These factors create second-half risks for Omnivision. Baird lowers their target to $24 from $34 while leaving OVTI Neutral rated.

Details:

- We believe Omnivision lost significant market share in PCs as well as in China late last year due to its focus on Apple.- Beneficiaries include Aptina, Samsung,and SETI.- We believe Samsung is now sampling CMOS image sensors to Apple for potentialfuture products.

Our recent field research points to Omnivision’s 8mp BSI sensor potentially not ready by the time the iPhone 5 launches in July.- We believe there is now a higher likelihood Sony could be the sole CMOS image sensor supplier to the iPhone 5 during its initial ramp.- We see no delays in the launch of the iPhone 5 so far.

Our field research leads us to believe BSI’s yields remain sub-par .- BSI is likely not the reason for the recent improvements in Omnivision’s gross margin, in our view.

We believe Omnivision failed to secure additional wafer capacity late last year due to higher wafer prices.- We believe Omnivision’s ties with both foundry and tier-one customers may be frayed for some time.

Net, Omnivision could face a difficult second-half outlook, in our view.- Above-mentioned share losses could represent a partial offset to the iPad2 ramp in the April quarter.

Notablecalls: Ouch, this could hurt OVTI. Last time around Baird hinted the iPhone5 sensors could be dual-sourced the stock took a 10% hit intraday.

OVTI is set to report #'s tomorrow after market close & if Baird's tech team is right, they may have to cut their guidance (regardless of CMOS demand).

Looking for $24 level as 1st support.

Kudos goes to Tristan Gerra, Baird's Semiconductor Component Research analyst for his wonderful work on OVTI.

Hewlett-Packard (NYSE:HPQ) got taken to the back and shot last night after posting somewhat weaker than expected #'s & guidance.

Despite the 12% (6 pt) haircut we have almost every Tier-1 firm out defending HPQ this morning, telling clients to buy the weakness.

- J.P. Morgan reits OW and $55 tgt (prev. $57) noting enterprise systems (servers, storage, and networking) performance was much stronger than expected, but it was more than offset by weakness in PCs and services. The near-term stock performance could be bumpy owing to a reset to revenue growth at a time when investors are not taking kindly to any decliners. They expect the pain to be rendered temporary, though, as HP’s models should benefit from an increasing mix shift to the enterprise and a resilient operating margin profile.

JPM thinks HP could surprise to the upside strategically. They also believe that HP’s outlook is a function of part end markets, part execution, meaning remedies could be in the making. Next catalysts are 1) the HP Summit and 2) potential acquisition that is deemed strategically sound.

- Morgan Stanley: F1Q Blemishes Create Buying Opportunity. Weaker demand and execution issues in consumer PCs and application outsourcing drove a F1Q / FY11 revenue miss and guide down. The execution issues will impact the stock near-term but they continue to believe that HP can invest in R&D and sales coverage without lowering its operating margin in light of the mix shift to higher gross margin products like networking and storage. Firm views HP as a sum of the parts story in the medium-term with its Enterprise business alone worth $44 (1.7x FY10 Revenue). They're buyers of the stock below $44 as they believe no value is attributed to the $66 billion PC and Printer segment at those levels, more than discounting secular risks. Reits OW & $57 tgt.

- UBS: Counting on the Second Half. Firm reits Buy and $52 tgt noting catalysts for more material multiple expansion likely pushed back... …but still anticipate more refined strategy & catalysts in FY2H. UBS expects HP's "new" strategy to highlight a focus on leveraging one of the broadest portfolios in the IT space to take advantage of mkt trends (ex. cloud computing, solutions sales). Additionally, they believe drivers to FY2H are largely still in place (webOS sell-in ramp, some services improvement, pot'l China PCs).

- Barclays: HP’s first full quarter with a new CEO was clearly disappointing, given the weakness in services and downside guidance for the rest of the year. That said, EPS expectations do not move too much lower given higher margins, and it seems shares will open at close to trough valuation. Based on cash flow multiples, the firm believes the stock could see some support in the low $40s at 9-10x FY11 FCF. Maintains Overweight and $49 tgt.

- Bernstein: Credibility Undermined and Fears Reignited... Time to Build Positions. HP's stock retreated 12% in the aftermarket, and is likely to be in penalty box in the near term, particularly since CEO HP Apotheker stated that investors should not expect "financial targets" at his Strategy Summit on March 14. Firm believes that a pull-back provides a buying opportunity in HP, given the resiliency of HP's business model – an estimated 56% of the company's profits are recurring/annuity like –and Bernstein's belief that the company can grow EPS ~10% annually longerterm. Given its financial profile, they maintain that HPQ is very inexpensive at its current valuation, trading at 8x FY11E EPS.

While there may be no catalyst for HP's stock near term, they would use any pullback in the name today to add to positions.

Notablecalls: Leo Apotheker is the new CEO. The thing with new CEOs is that they almost always try to reset expectations a bit lower than they actually believe they can accomplish. This is tied to winning credibility and sometimes gaming the options.

- Morgan Stanley is reassuming MCP with an Overweight and $63 price target (41% upside) noting they see Bull Case value of $140 per share; it is based on REO prices 90% of spot and suggests a 6:1 risk/reward skew — the most attractive in firm's coverage universe.

Both of these moves come upon completion of the recent secondary (13.5mm shares sold at $50) and convertible preferred (for $180mm) offerings.

Some details:

- J.P Morgan notes the increase in their price target is to reflect the company’s decision to double its capacity to 40k tonnes starting in 2014, which should enable MCP to sell a greater amount of material, at higher prices, earlier on. Additionally, their expectation for higher medium-term rare earth prices is also pushing their target higher.

Rare earth prices continue to move higher. Rare earth prices have continued to move higher over the past several months and recently took another step up after a pause during the Chinese New Year holiday. JPM thinks this is largely due to two factors. The first is that consumers still see an undersupplied market and are willing to pay even higher prices to guarantee supply. The second is that they believe the Chinese government's increasing efforts to crack down on illegal mining and exports is reducing supply that had probably been close to 20k tonnes in previous years compared to an export quota of 30k tonnes in 2010.

- Morgan Stanley: Well Positioned in Tight REO Market; Overweight

1. Chinese supply to remain tight. MSCO believes China will continue to restrict exports of REO. They expect 2011 fullyear quotas to be down ~20% yoy (base case). A successful crackdown on illegal exports could cause supply outside of China to fall by as much as 40% yoy. While their conservative price deck is in line with consensus, they think risks to pricing are strongly skewed to the upside as shrinking supply meets rising demand, benefitting from use in electronics and energy efficiency.

3. Downstream integration will improve exposure to high-end markets and could add $14/share. Molycorp is pursuing JVs to gain access to intellectual property needed to produce alloys/magnets. MSCO assigns a high likelihood to successful downstream execution, the value of which may be overlooked by the market.

Changes to model. MSCO's 2011e EPS is $0.14 (previously, they expected a $0.19 loss) due to new company guidance for 33% higher volumes and 100% higher pricing. Their price target was $27. It is now $63 based on higher REO prices and doubling of production plans. MCP is trading at 0.34x their DCF (vs. 0.56x on average since the IPO) and 3.6x 2013 P/E at spot prices.

Notablecalls:The $140 Bull Case target from Morgan Stanley is what gets me going. The JPM upgrade works OK as a trigger but the MSCO call is where the real juice is.

I think many short side operators have been leaning on the space following the secondary induced squeeze (many tried to game it ahead and got killed) & will be looking to cover. After all, you have two of the most influential firms blessing MCP this morning. Short interest stands at 20-25%.

Thursday, February 17, 2011

I'm sure most of the trading community is familiar with a Chinese advertising co called China MediaExpress Holdings (NASDAQ:CCME). The company has been under attack by several short-sellers recently, causing a 10 pt drop in its share price over the past 2-3 weeks. Short-sellers have claimed the company to have overstated its revenues, among other things.

- This morning a small outfit called Global Hunter is out with a rather strong defense of CCME. Firm notes they were in China last week to conduct additional due diligence on the co.

Here are the details:

We visited CCME’s headquarters again, and reviewed all of its contracts with advertising clients and bus operators, tax filings, and bank statements for the last three years. We called or met 16 top advertisers, who verified a total of approximately $105MM of revenue or ~50% of our estimated 2010 revenue. We called China Telecom, and the exclusive advertising agents for Coca Cola and L'Oreal, who confirmed they have placed ads on CCME's platform. We also spoke to 17 bus operators, who confirmed that they have signed in aggregate 14,191 buses with CCME, or 52% of the total number of buses CCME reported.

REMOVED CONTENT REMOVED CONTENT REMOVED CONTENT REMOVED CONTENT

REMOVED CONTENT REMOVED CONTENT REMOVED CONTENT REMOVED CONTENT

(requested by Global Hunter Securities LLC)

Reiterate Buy. Our due diligence work further reinforced our thesis. We continue to believe CCME is a leader in the intercity bus advertising market with a unique business model and large growth potential. We reiterate our Buy rating and $26 price target.

Notablecalls: It certainly looks like the people at Global Hunter have done some work on CCME. Could we be in for a bounce, considering:

- The stock has pretty much been cut in half recently. From $22 to $12.

- Short interest stands at 50%.

- My guess is, CCME has become a bit of a retail short play. Not your usual tough-as-nails type of short sellers who stick around.

- I watched shorts get killed in a certain Chinese 'fraud' name yesterday. Made me say hmmm..

All in all, I think CCME warrants some attention in the n-t. This one could squeeze hard, once it does.

Tuesday, February 15, 2011

Recent momo darling JDS Uniphase (NASDAQ:JDSU) may see a bit of a pullback today.

Here's why:

- Bernstein is out downgrading the name to a Market Perform from Outperform saying they believe that at least two assumptions are necessary to justify JDSU's stock – currently up 93% YTD – at the current valuation:

1) robust margins in the optical business persist long-term; and

2) new business segments propel growth.

In the first section, which forms the crux of their new Market-Perform thesis, they review the margin history of the Optical Communications industry and examine how quickly advantages are competed away, using ROADM WSS components (22.9% of JDSU 1H CY2010 Optical Communications revenue) as an example. In the second section, they do a deep dive into the fiber laser growth opportunity for JDSU. Despite long-term upside in fiber lasers, the firm does not think that the opportunity is sufficiently near-term to justify current valuation. While Bernstein expects Optical Communications and the new fiber laser initiative to be highlights of JDSU’s analyst day on February 17, they do not expect incremental news that sustains the stock's momentum.

(its's a 27 pg. note)

- Little known Evercore Partners is downgrading JDSU to Equal Weight from Overwright. They think that After a 95% upswing YTD, risk-reward is now balanced.

- Credit Suisse is out with a somewhat muted piece on JDSY saying the name currently trades at just over 25x their CY12 EPS estimate of $1.12. Even with significant upside potential to their estimates, the stock appears rich. Firm notes they wait for a pullback (likely not until after the analyst day) to consider a more constructive stance.

Maintains Neutral and $22 tgt.

Notablecalls: It looks somewhat toppish if you look at the chart. Doesn't it?

I think the market may be in for a pullback and JDSU is my poison of choice for playing it. Just a situation call.

Goldman Sachs is upgrading U.S. Steel Group (NYSE:X) to Buy from Neutral with a 6-month price target of $75 (prev. $61) representing upside of $28%.

Firm notes they believe that rising steel prices and increasingly positive leading indicators of demand are pointing to a steel industry that should see its earnings markedly improve in near to medium terms. With a high leverage to steel prices and demand, and one of the best cost positions on the raw materials, they see potentially significant upside to US Steel’s share price.

Goldman believes that markets’ concerns about recent dip in scrap prices are over done. The domestic steel prices should get strong support from rising global steel cost curve, which in turn should push global steel prices further up. We see companies with vertical integration into raw materials as the best investment option in this environment. US Steel, thus fits the best among our coverage. Additionally, its high fixed cost structure (or high leverage to rising utilization rate) puts it in an advantage as steel demand and thus the utilization rate are expected to continue to rise in coming months. They estimate US Steel’s utilization rate to rise to 85% in 2011 from 76% in 2010.

US Steel’s earnings have suffered and the company has struggled to generate profits as the utilization rate has remained below optimal level. As both prices and production rates are rising, its favorable cost structure on raw materials provide it relatively better opportunity than its peers to generate strong earnings.

US Steel’s iron ore costs in the US is less than $65 per tonne (vs. current global spot price of $191 per tonne) and its 2011 coking coal contract price is set at about $200 per tonne (vs. current global spot price of $312 per tonne). These favorable input costs imply that as utilization rate rise and fixed costs are spread over higher tonnage, X should have one of the highest leverage to improving conditions.

But scrap price is falling, shouldn’t steel followAn obvious risk in this scenario is the scrap price. In recent months, it was rising scrap prices that heralded in the current round of price increases. This was exacerbated by a seasonal uptick in demand. Once the weather improves and scrap flow into the yards increases, scrap prices usually fall. That said, the firm believes that the market is missing the point that although raw material prices have been the primary source of rising steel pries, demand (both real and apparent) has also strengthened and thus they see less risk from a modest dip in scrap prices, at least in the near term

- Goldman still expects the 1Q2011 loss at $0.61 for X due to the lag in contract prices as compared to the spot prices but consider this as a timing issue.

The same contracts will help US Steel sustain earnings beyond 1Q. Goldman now expects higher shipment volume (an increase of 13% year over year vs. 9% earlier) with estimate of the utilization rate of 85% (up from 82% earlier) for US Steel’s Domestic Flat Rolled division. This should help offset some of the fixed costs per ton. They are also lowering their coking coal cost for US Steel to $185 per ton from $200 they had estimated earlier. This is in line with the guidance provided by the company in its 4Q conference call. As such Goldman's 2011 estimates have moved up to $3.50 from $2.50.

They are also raising their 2012 and 2013 estimates on higher than expected utilization rate and hence higher shipment volume, particularly for its Flat Rolled Division.

Notablecalls: Goldman is essentially saying Tanners, the UBS analyst is wrong on her Scrap Steel call. Tanners left a 5% dent on the space but looks like the shorts are now trapped as the group is back to its highs.

X may see $63 level today on this call, I suspect. Let's see how it goes.

Monday, February 14, 2011

I am the guy who replied to the "Straits of Messina" piece you did last April. In that piece, the analyst suggested that Sandisk would make $2.41 in 2010, while the consensus was at $2.71, and I was between $4 and $5. It turned out to be $4.60.

1. Avian says that they think bit growth will be 101-120% in 2011. Well, Steve Newberry of LRCX just said in their CC that he expects 85-95% bit growth, and they are higher than the vendors' own estimates (MU for example has said 70-80%). I have to believe that Newberry, as an important equipment supplier to every NAND vendor, has a good handle on that.

2. He makes numerous assertions about NAND capacities in tablets--"our checks indicate only 16GB or less of NAND" ex-Apple. Well, aside from the fact that Apple currently dominates tablet sales, that is mildly absurd. These things are going to record 1080 video and have 5-10 megapixel cameras, but only 16GB of storage? They better have card slots for additional storage, if so. The cards, as a reminder, use NAND.

3. Avian says "demand side could be too high" (my ital); yeah, sure. And it could, as has happened since the iPad went on sale, also surpass current estimates. Sure, most of the non-Apple entrants won't make it. But most of the vendors won't just stop making new versions either. They will retool, and come out with new versions--the potential market is just too large and too important to just cede the tablet space.

4. Avian says, "Smart-phone embedded capacity shrinks as Android outpaces iOS." Well, good grief, non-Apple smartphones try to compete by outspecing Apple. "We gotta better deal--twice as much storage"--and that amount will increase as the price of NAND goes down, which it certainly will. Plus Apple is now planning to come out with a cheaper iPhone to address the lower priced market. And so-called "feature phones" becoming extinct as more people want their phones to do--and "remember"--more things. But--

5. The price of NAND hasn't come down. Q1 is seasonally a weak quarter for pricing, but so far, despite projections to the contrary, pricing has remained firm to slightly up, in both spot and contract pricing. Even normally bearish inSpectrum just came out with a cautiously bullish report on it, although they say they doubt its "sustainability." Of course, since inSpectrum has been bearish for a long time and been wrong, maybe they are a contrary indicator.

6. He is right to say that a lot of new supply is coming to market in 2011. Most of it will come in Q3 and Q4, though. And he conspicuously doesn't even mention SSDs. SSD sales have started to simmer--and when the 2x node becomes more common, and pricing really does begin to slide, they will become even more common. It is astonishing to me that there is no mention of it when he is talking about supply.

7. Just as conspicuously, he fails to mention Toshiba/Sandisk. He claims that MU/Intel is "leading the way" in the transition to 2x. It is true that they were the first to announce, and the first to market with it. But their quantities are still relatively small, which is one reason why MU and Intel still have single digit market shares and have not been gaining on the leaders, with Samsung and Toshiba/Sandisk each having high 30 percent shares.

8. Micron doesn't have Intel's help in IMFS; Avian spins this by saying that it "potentially opens the door for a new capital infusion partner in IMFS." Good grief--and who would that partner be? Hynix creditor/owners have been trying to find a buyer for its operations for well over a year now; no one wants to get into this business, however booming it is. The reason is that it is a duopoly, with both of the leaders being extremely strong financially and technologically. It is difficult to make NAND. The DRAM producers who tried to break into the market a few years ago found it impossible to do it profitably. Intel was only mildly profitable in NAND in H2 of last year as per their CC, despite the fact that that was an incredibly strong market (why do you think that they aren't participating in IMFS?), while Sandisk and Toshiba both made strong profits in NAND. Micron will remain a second tier player in NAND, along with Hynix. The duopoly will continue; no one else will be entering this space. The barriers to entry are simply too high, contrary to those who persist in sneering that NAND is "just a commodity." NAND, as Eli Harari said on more than one occasion, is not DRAM. They are very different products, and the two spaces have very different structures. This is very poorly understood, probably because it is certainly true that they have many similarities.

9. Which brings me to the last point--Avian says "Continued expansion in 2012 will add 200k+ WSPM as Samsung begins to flex Line 16’s muscle." Well, that is a favorite line of people who are bearish on NAND (usually that means Sandisk, since they are the only pure play in it). As if Samsung will destroy its competition in NAND like they did in DRAM. They ignore first, that Samsung already tried to do this a few years ago and while they did essentially drive out the Taiwan wannabes, they didn't drive out Toshiba/Sandisk (although they did weaken Sandisk). Second, that Samsung pays royalties to both Toshiba and Sandisk. Third, that technologically, they are inferior technologically to Sandisk and Toshiba in NAND. And fourth, it is already a duopoly; who else are they going to push out? There may have been some justification for their past market share grab in 2006-07, when the Taiwan DRAM players were trying to edge into the market. But that is no longer the case. Micron is no threat; their new fab will have a capacity of about 100 wpm, not enough supply to push them into Tier 1 status.

Avian says that there will be 200k+ wpm in 2012; well, that is likely, but it is also very likely that 2012 will be the Year of SSDs like 2011 is the Year of the Tablet. And, news flash, SSDs will eat up a whole lot more capacity than tablets. Price elasticity will rule--As NAND ASPs come down, more computer vendors will be using SSDs in their machines, and more consumers will opt to buy them. Any NAND supply glut will be temporary for at least the next few years as SSDs become the norm.

Notablecalls: Excellent stuff!

Disclaimer: I have no clue who this reader is. Judging from the quality of the commentary I'd guess he is a) a fellow sell-side analyst b) a buy side analyst c) an industry insider.

Sunday, February 13, 2011

Avian Securities was out with some interesting comments on the NAND market on Friday:

We shifted to a negative view on MU and SNDK two weeks ago. Additional data points we have encountered since our change in opinion have only reinforced our cautious view on the memory space. Specifically, evidence of additional expected NAND wafer starts as well as data suggesting further acceleration in NAND process transitions has caused us to increase our estimates around bit supply growth in 2011.

Additional data we have encountered suggest further acceleration in NAND supply than the street has modeled. Our bit growth assumption are now for 101-120% bit growth while street estimates are for 80% bit growth. Second point, the street anticipates avg. of 40GB of NAND in new tablets while ex Apple we are seeing a MAX of 32GB but our checks indicate only 16GB or less of NAND. Bottom line is much more supply coming online than anticipated and demand side could be too high as well.

Additionally, negative data points around non Apple tablet penetration as well as stabilizing memory content have led us to question whether consumption of NAND will be as robust as we had previously expected. Thus, we believe potential for forward pricing pressure is increasing as the gap between 2011 NAND supply and demand projections grows wider. In light of further deterioration in our outlook, we are reiterating our negative outlook for SNDK and MU.

Conservatively, 250 additional WSPM will be online by Q4 2011.

The transition to 2xnm is accelerating with MU/INTC leading the way in 2010 and 11.

Continued expansion in 2012 will add 200k+ WSPM as Samsung begins to flex Line 16’s muscle.

Ergen On the Verge . . .Charlie Ergen could be on the verge of adding great value to his empire of media and telecommunications assets. If Ergen is a) able to get control of both DBSD and TerreStar, and b) the FCC relaxes MSS spectrum regulations, then:

- DISH will have paid ~$1.1BN for an asset that CSFB values at $3-$5bn

- Ergen could combine the DBSD spectrum (20 MHz of MSS spectrum) with the 20 MHz of MSS spectrum that SATS is attempting to acquire via the TerreStar transaction, creating an extremely valuable tranche of contiguous spectrum (40 MHz). This is clearly a case where “the whole is greater than the sum of its parts.”

- Credit Suisse believes that AT&T has bid for DISH’s DBS assets in the past. If Ergen is able to pair his spectrum assets with his DBS business of 14mm subs, AT&T might find Ergen’s creation to be an enticing combination.

Will AT&T Get Back in The Game of Bidding for DISH? It’s Certainly PossibleIf things play out the way Ergen hopes, DISH could once again become an appealing asset to AT&T, for three reasons:

While not stunningly accretive, a purchase of DISH might be attractive for AT&T, given that the company guided to relatively lackluster EPS growth of 5% for 2011, and gave investors little reason to believe EPS growth would accelerate in 2012 or beyond. AT&T’s most ardent EPS growth has come on the heels of big M&A deals – EPS growth has averaged 2% over the last decade; however it landed at 25% in the wake of the AWE / Cingular deal, 28% in the wake of the SBC / BellSouth deal, and 22% in the wake of the SBC / AT&T deal. Not surprisingly, these were also the best periods for stock price appreciation

Excluding integration costs, Credit Suisse estimates that a stock for stock deal, whereby AT&T acquired DISH at ~$39 per DISH share, would be 1.5% accretive in year 1 (assuming 12/31/12 close) and 4% by year 3. Including integration costs, the deal is EPS breakeven in year 2 and 3% accretive by year 3 . Firm assumes that a deal for the SATS spectrum could be done in cash.

2) AT&T sees strategic value in DBS assets. Randall Stephenson has noted in the past that combining a DBS asset with AT&T would build value through synergies, reaching $16b in his estimation.

3) AT&T would get two pieces of valuable spectrum – 40MHz of MSS spectrum, and 6MHz of 700MHz spectrum that is a perfect compliment to the spectrum the company just purchased from QCOM.

Deal Terms & Structure: Getting to YesDISH apparently walked away from a $55 offer from AT&T in 2007-08. This would have valued Ergen’s personal stake in the business at ~$13.5b. Some had speculated that Ergen was looking for as much as $65/share, which would have valued his stake at close to $16b. Credit Suisse thinks it would be very difficult for AT&T to offer Ergen anything close to $16b for his stakes in DISH and SATS today.

Having said that, the firm believes that T could afford to offer Ergen something every attractive. In fact, they estimate that AT&T could offer Ergen a premium to the current value of his stakes in DISH and SATS, of ~70%.

Why now?Credit Suisse notes that when they last met with senior mgmt at AT&T they told us they did not see any large deals in the US on the horizon – the regulatory environment simply wasn’t conducive. What has changed:

1) The big issue then was net neutrality – this has been resolved, at least to AT&T’s satisfaction.

2) The CMCSA / NBCU has been approved with conditions that Comcast can appear to live with.

3) The composition of congress has changed and the administration appears to be shifting to the center.

4) Most importantly, DISH now has an asset that AT&T really wants (20 MHz of MSS spectrum), in addition to the DBS business.

Notablecalls: I suspect this is a very significant & timely call by CSFB's team:

- AT&T needs the spectrum and they certainly need the growth. Remember this is a $190 bln company, which means they have the ammo to buy DISH & SATS.

Remember, AT&T has offered $55/sh for DISH in the past.

- TerreStar has a confirmation hearing on March 4 for approval of a reorganization plan in which control may go to EchoStar where Ergen is chairman. That may serve as the catalyst.

- Every fund manager in the Universe is looking for upside opportunities like this one where you can get 70%+ upside with relatively limited downside.

They will read the 18-page call from Credit Suisse today, close their eyes and just buy, buy & buy.

I suspect DISH will trade higher today toward $23-24 levels. Goes higher from there in the coming weeks.

Tuesday, February 08, 2011

Merrill Lynch is making a significant call on the U.S. Gaming space saying the believe Las Vegas is on the cusp of a multi-year cyclical recovery, driven by favorable supply-demand dynamics of accelerating RevPAR and gaming win against decelerating room supply.

Why upgrade now? Sharp group biz rebound is accelerating recoveryRecent commentary from both gaming and pure lodging companies points to a very sharp recovery in both Las Vegas and broader U.S. group business trends. Two such examples are Las Vegas Sands and Starwood. On its 4Q10 earnings conference call, LVS noted that 2011 group bookings are up 100%+ vs. where they were at this point last year for 2010 and estimated group rooms of 781K in ’12 with ADR up over 10% on those bookings.

To get a sense for bigger picture U.S. group business trends, on Starwood’s 4Q earnings call it noted that December 2010 group bookings “crushed” the all-time monthly record, its group bookings pace is up double-digits in ‘11, and that group booking windows have begun to lengthen as corporates plan events further out in the spectrum as visibility increases. These trends should be no different for MGM and Merrill doesn't want to miss the turn. Corporate business is only 15-20% of the mix for MGM, but like with the lodging companies, investors underestimate the power of mix shift early in the cycle – particularly at MGM’s best hotels like Bellagio, CityCenter, Mandalay Bay and MGM Grand.

A number of catalysts should drive MGM shares in 2011In addition to their belief that MGM’s estimates have finally bottomed, catalysts include: 1) a 4Q EBITDA beat (our $317M vs. Street’s $286M) that could be the first in 21 quarters, 2) sequential EBITDA acceleration in 4Q and 2011 as 4Q could be the first Y/Y growth in 3+ years, 3) favorable monthly Las Vegas gaming results, and 4) strategic moves including a Borgata sale.

Actions in ’10 solve the balance sheet issue until 2013Merrill notes their big hang-up has been MGM’s balance sheet. While MGM is still not FCF positive, they see less of an overhang as a result of actions taken in 2010 (several note offerings, a $600M secondary and CC refi). The firm doesn't expect a dilutive equity offering until mid/late 2012.

Their bet is simple: Glass is half empty to glass is half fullAs revenue trends improve MGM shares should follow. Sentiment will improve from “the glass is half empty” to “the glass is half full”, and recognize that each business has increasing potential for significant EBITDA margin expansion and upward earnings revisions. The sensitivities to improvement are clear.

20% of MGM’s float remains short, which can continue to come down as skepticism in a recovery, and fears of a second liquidity crisis, decline. Then, as the recovery has taken hold and picked up momentum, investors will begin to embrace MGM’s captive real estate value and some of the non-EBITDA generating assets accumulated during the boom years like its vast Las Vegas land holdings.

Notablecalls: So we have a tier-1 firm openly calling for a bottom in Las Vegas. Due to trading volume, MGM is my poison of choice. Given the high short interest and the recent pullback, this one could see levels close to $16 today.

I think BYD moves as well. Here's what Merrill had to say about it:

Las Vegas is recovering and we believe Boyd is a derivative way to play the recovery with nearly 50% of total EBITDA coming from the Las Vegas Locals and Downtown markets. We upgraded MGM to BUY this morning on the Las Vegas recovery potential, and BYD eventually should benefit from the same trends.

BYD could easily do $11.75+

You may want to wait for open to initiate positions. Paying up in the pre market may not be the wisest idea as MGM trades 20-50mln per day. Not exactly a thin name.

Friday, February 04, 2011

UBS Steel team is out with a fairly interesting call titled: "Pricing Pause or Inflection Point?"

Slipping scrap makes buyers skittishGlobal scrap prices are falling and UBS industry contacts see more weakness ahead. Even with Turkish buying and reasonable U.S. demand, they heard shred was $440/t this wk from a peak $520/t in Jan. as “prices were just too high” and buyers had rebuilt inventory. Chinese new year’s typical pause may be part of the weakness, but spot met coal also seemed eager to slip once it was clear Australia ports were spared the brunt of the recent cyclone. Scrap is often a leading steel price indicator.

“Steel prices will only be too high when you read it in the WSJ”The CEO of a large distributor this week said steel prices were not too high, as the WSJ and other media had not reported on steel causing inflation. Today a top WSJ article addressed high steel costs. A 64% spike in benchmark US HRC since an Oct trough overshot most global prices and may invite import, as input prices ease.

Supply disruptions may delay the inevitableWhile pricing cycles have contracted from ~1/yr to 2.5x/yr, the firm notes they may be early in calling a peak but still think it is imminent. Praxair oxygen supply woes can limit output at 2 mills about a wk, and some other weather-related issues can support pricing or one more hike near term. Still, they think many buyers prebought into mkt strength but are now more cautious, especially in light of retreating scrap prices.

Steel price correction near-term prompts a more cautious viewUBS see a relatively mild retreat in steel and scrap prices in coming mos ultimately providing better buying opportunities, especially for structurally favored names, such as SCHN, ATI, and STLD. They think weaker prices are worst for AKS and X.

Notablecalls: Timna Tanners, the UBS analyst making this call is actually pretty good.

Tuesday, February 01, 2011

Advanced Micro Devices (NYSE:AMD) is getting a major bump from Sterne Agee this morning with the firm upgrading the name to Buy from Neutral with a Street high price target of $15.

- Sterne believes AMD has been on a streak of market share losses in the PC-server market culminating with the recent loss of the AMD CEO. They believe that should mark a cyclical fundamental bottom in market share.

Potential NB-Server Share gains: AMD has been on a long 4- year streak of market share loss to Intel (INTC – $21.46 – Buy) with Intel’s successful launch of Nehalem Xeon Servers and SandyBridge platforms. The 8-year chart (below) shows AMD’s Notebook (NB) market share at 12-14% and Server Market Share at 5% both now at historical cyclical bottoms, especially in front of the launch of Llano-Bulldozer products. While AMD was expected to launch its Bulldozer-Llano late in 2010, AMD has lagged with delays. Sterne believes that AMD should be able to introduce its Bulldozer and Llano platform in C2Q11 which will imply some share gains by YE2011, potentially with much better NB-Server gross margins closer to 50-65%. The last Opteron Server Upside cycle was a full 3 years upside for AMD.

- Sterne believes the last successful NB platform launch in 2003-04 propelled AMD to 19-20% market share. AMD’s next platform Llano, now in 2011, should hit the OEMs- ODMs in C2Q11

Server Market Share at Cyclical Lows:They believe AMD’s Server market is now at historical lows. When AMD last introduced its Opteron Server in 2003-04, it led to a 3-year cycle of market share gains, with associated multiple and market share expansion. However, in 2006 Intel launched its Nehalem Xeon Architecture leading to AMD’s share decline. Now we are on the next generation as AMD gets ready to launch its next Generation Bulldozer Server platform. A 5% Server market share gain at a 65% margin adds approximately $500M and $0.20 in EPS to AMD.

CEO Exit: While AMD’s CEO exit created a management vacuum in the middle of a product transition, the firm believes the installation of a new CEO over the next couple of months should be another positive catalyst.

Sterne believes AMD saw the perfect storm with 1) INTC SandyBridge Launch, 2) Delays with Llano, 3) Server Share loss, and 4) Top Management Moves. They therefore believe this should mark a bottom, and any improvement in any of the areas above should be upside.

Estimates and Valuations: They believe given AMD management comments and potential NBServer share gain, AMD can do 48-49% GMs by C2012. Also assuming a 5% Market share gain to AMD is an incremental $600M in revenues. AMD in 2006-2007 at 10-15% Server market share was trading at 53-57% GMs. Firm is raising their C11E from prior $6.65B/$0.29 to $6.7B/$0.37 and their C12E from $6.8B/$0.45 to $7.3B/$0.95. Their $15 PT on AMD is about 16x their C2012 EPS of $0.95. AMD has traded between 10x and 40x forward P/E in the last 10 years.